Search


Subscribe to AFM


Subscribe to AllFinancialMatters
by Email

All Financial Matters

Promote Your Page Too

The American's Creed

Site Sponsors

Books I Recommend


AFM in the Media


Money Magazine May 2008

Real Simple March 2008

Blogroll (Daily Reads)

« | Main | »

What Do You Think of This Reader’s Plan?

By JLP | May 13, 2008

Here’s an email I received this morning from a reader:

Silly me…..I have been reading your column and never thought to ask you a question!! I love reading your blog. I have been agonizing over what to do.

Here is the situation…..I am 50 years old, take home $68,000 a year (total of 2 jobs).

I did the Rave Ramsey Financial Peace University in January 2008. Paid off ALL debt ($8,000) but the house. I have $84,000 left on the mortgage which I plan to have paid off in about 3 years time. Yippii!!!!!! I will then be able to start building some real wealth…at least that is the plan.

I work 2 jobs to make up for my idiotic choices of the past. At my part time job I have a 4% match, which I do. At my full time job they give me 6% of my salary. I do not have to match it. I do contribute 15% at this time. Should I not be contributing and put my money (the 15%) in a Roth IRA. I have not yet started any kind of IRA. I have approx. $100,000 in my combined 403 and 401.

I plan on working both jobs till I am 67…….if only I knew what I know now at 18 :)

Thank you,

Toni

She followed up with another email to say that she did have an emergency fund.

Since she didn’t ask any questions I’m going to assume that she wants our thoughts on her plan. A couple of things I noticed:

“I have $84,000 left on the mortgage which I plan to have paid off in about 3 years time. Yippii!!!!!! I will then be able to start building some real wealth…at least that is the plan.”

Although I see nothing wrong with paying off a mortgage early, one thing to keep in mind is that the decision implies an allocation choice. The additional money that you direct towards paying off your mortgage early is money that could be invested elsewhere (like saving for retirement). So, you have to ask yourself if paying off your mortgage early is really the best way to use your resources. I have written quite a bit on this topic in the past. You can find those posts listed under Mortgage in the directory.

“I work 2 jobs to make up for my idiotic choices of the past. At my part time job I have a 4% match, which I do. At my full time job they give me 6% of my salary. I do not have to match it. I do contribute 15% at this time. Should I not be contributing and put my money (the 15%) in a Roth IRA. I have not yet started any kind of IRA. I have approx. $100,000 in my combined 403 and 401.”

I think it’s awesome that you are working two jobs! No, it’s probably not fun but nothing says you have to do it forever.

I think a Roth IRA is a good choice because it gives you some “tax diversification.” You won’t get the tax deduction now, which means your current taxes will be higher. However, income from the Roth will not be taxable (assuming the money has been in there at least 5 years and you are over 59 1/2 when you begin taking withdrawals) AND it Roth income doesn’t count against you in deciding the taxability of Social Security. This is a nice benefit of the Roth that doesn’t get discussed too often. Also, remember that there are no required minimum distributions with a Roth IRA so you could let the money sit there and grow as long as you didn’t need it.

One advantage to working longer is that you can put off taking social security, which means you can expect a larger check when you do begin taking it.

If you would like me and AFM readers to comment on your retirement plan contributions, send me an email and I’ll be happy to take a look at it. There’s just not enough information to be able to tell you how much you could possibly have at retirement. I will say that you seem to be on the right track.

Topics: 401(k), IRAs, Retirement Planning, Roth IRA | 10 Comments »


10 Responses to “What Do You Think of This Reader’s Plan?”

  1. Thrifty Femme Says:
    May 13th, 2008 at 3:01 pm

    I would take the 15% she currently contributes to the 401k and open a Roth IRA to try to contribute the maximum $6000. If that is easily doable then I would begin contributing to that 401k again. I would rather have more tax free money than taxable money if at all possible.

  2. Amy Says:
    May 13th, 2008 at 3:04 pm

    I understand the argument against paying off a home early and won’t get into except to say – she’s got the Dave Ramsey bug (as do I) so don’t expect to sway her against paying it off! :o )

  3. DMA Says:
    May 13th, 2008 at 3:51 pm

    Sounds like she has done a great job with the debt! If it were me, I would max out the retirement accounts and then apply the remaining amounts towards retiring the mortgage early. That way she gets the full time benefit of having the funds invested for the next 17 or so years.

  4. Baba Ghanoush Says:
    May 13th, 2008 at 4:12 pm

    I’d agree with DMA #3 and max out the tax-advantaged savings before paying the mortgage early, unless she has a particularly bad mortgage (adjustable or high fixed rate). If not maxing out all tax-advantaged, then whether to contribute more than required for match in 401(k)/403b or to put some dollars in an IRA probably depends most on your plan options.

  5. muddlehead Says:
    May 13th, 2008 at 4:34 pm

    would not pay off house early. max out to the match in 401k’s. any leftover, open roth to the max investing no load market index funds – equity and or bond, depending on your stock market risk tolerance . any leftover, start a taxable investment account in same investments.

  6. Nobody Important Says:
    May 13th, 2008 at 6:06 pm

    it’s easy for us twenty and thirty somethings to tell someone to not pay down the mortgage but I can only imagine what it feels like to be heading into retirement age and still not own your dwelling outright. Security is a big motivator.

  7. Bozo Says:
    May 13th, 2008 at 10:32 pm

    Whew, this woman has a game plan! I would lean towards paying off the house first. If you do the math, if Toni works until she’s 68, she will have amassed enough in her retirement accounts to throw off (in addition to Social Security) more than what she is living off today. All in today’s dollars. Here’s how I came up with it.

    We know she plans to pay off her $84K mortgage balance in three years, which means she is paying it down $28K/year. Subtract $28K from $68K (her take-home); she lives on $40K/year, including the debt service on the mortgage. Presumably, she can use that $28K/year to fund a “new” IRA and/or other investment vehicle(s) once she is 53. Assume she works until 68 at or about the same income level (in today’s dollars).

    A $100,000 nest egg, added to in the amount of $28K/year, compounding at 5% (8% actual – 3% inflation erosion), for 15 years (age 68 – 53), yields approximately $842,000 (in today’s dollars).

    When she turns 68, she starts to spend the income the fund throws off (at 5%, over $42K/year, which is more than what she now lives on). Of course, unless she has heirs she is particularly fond of, she could annuitize the fund (say for a 40 year period) and it would pay out roughly $47K/year (again in today’s dollars).

    And if she ever needs assisted-living or whatever, there’s always that paid-off home.

    As I said, Toni has a game plan. Good for her.

    Yours,

    Bozo

    PS: I yield to other, wiser posters (and the moderator) as to Roth IRA versus other types of vehicles.

  8. Independent George Says:
    May 14th, 2008 at 10:05 am

    Usually, I’m fervently on the ‘don’t pay’ side of the mortgage, but we need to consider the fact that she’s 50 and plans to retire in 17 years. A 17-year time horizon for investing the difference is a lot different than the 30-year period we normally use for comparison; depending on the interest rate, it might actually be better to pay the mortgage off early. It’s still probably better to defer the payments, but I the risk assessments are very different.

  9. Ben Says:
    May 14th, 2008 at 1:40 pm

    Start contributing to a Roth IRA since you can never catch-up from not participating for the next 3 years. A true lost oportunity there. This will only add maybe 6-8 more months on your mortgage.

    Definitely don’t stop what you’re doing with the 401k/403b. Again, matching funds is money lost forever if you don’t earn it.

  10. Chad Says:
    May 16th, 2008 at 9:27 pm

    I’d say she’s right on track…. as long as shes doing 15% of her income in to retirement now and throwing whatever else she has left over at the house… get that payment gone.. that way the house is HERS and no one can come and take it away from her if for some reason she loses her income for a while, as long as she can make the taxes every year. and shes still putting something toward retirement… once the house payment is gone then she can just go nuts on retirement savings.

Comments